Freeman's Blog

Birthdays may seem less important as you grow older. They may not offer the impact of watershed moments such as getting a driver’s license at 16 and voting at 18. But beginning at age 50, there are several key birthdays that can affect your tax situation, health-care eligibility, and retirement benefits.

50 — Taxable distributions from IRAs and qualified employer retirement plans before age 59½ are generally subject to a 10% early distribution penalty (20% for certain SIMPLE plan distributions) on top of any federal income taxes due. But if you are a qualified public safety employee you can take penalty-free withdrawals from your qualified retirement plan after leaving your job if your employment ends during or after the year you reach age 50.

55 — If you’re not a qualified public safety employee, you can take penalty-free withdrawals from your qualified retirement plan after leaving your job if your employment ends during or after the year you reach age 55.

59½ — And all withdrawals from qualified retirement plans and IRAs are penalty-free after you reach age 59½, whether or not you’re still employed. Ordinary income taxes generally apply to these distributions. (Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty.) This is one of those key birthdays!

62 — You are eligible to start collecting Social Security benefits. However, your benefit will be decrease by up to 30%. To receive full benefits, you must wait until “full retirement age,” which ranges from 66 to 67 depending on the year you were born.

65 — You are eligible to enroll in Medicare. Medicare Part A hospital insurance benefits are automatic for those eligible for Social Security. Part B medical insurance ­ben­efits are voluntary and have a monthly premium. To obtain coverage at the ­earliest possible date, you should generally enroll about two to three months before turning 65.¹

70½ — You must start taking minimum distributions from most tax-deferred retirement plans. Otherwise, there’s a 50% penalty on the amount that should have been withdrawn. Annual required minimum distributions are calculated according to life expectancies determined by the federal government. This birthday is forcing you to start taking minimum distributions, whether you need them or not. You don’t necessarily need to spend it if you don’t need it. I have solutions for you!

Source: 1) Medicare & You 2017, U.S. Department of Health and Human Services

Planning for retirement is like planning a birthday party. You need a little foresight and knowledge to make the most of your retirement plan. So, contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

There are a number of good reasons why you may want to work part-time during retirement. Obviously, you would be earning money and relying less on your retirement savings. You may also have access to better health-care benefits. Finally, many retirees work for personal fulfillment. They enjoy staying mentally and physically active. Plus, they enjoy the social benefits of working in retirement. Some retirees just want to try their hand at something new & they aren’t ready to retire.

Others who are thinking about retirement aren’t’ ready to give up their day jobs just yet. In 2013, a phased retirement plan was introduced in some workplaces to help potential retirees ease into retirement more easily. It’s when a company allows an aging employee to “officially retire”, but keeps the employee on the payroll with the ability to scale back their number of work hours or become more selective on which projects they take on.

Earning a paycheck may enable you to postpone claiming Social Security until a later date. For each year you delay taking your Social Security benefits (from full retirement age to age 70), the annual benefit grows automatically by 8%.

Here are two more ways working in retirement could affect your Social Security benefits.

1. The Retirement Earnings Test

If you are working in retirement and receiving Social Security benefits prior to reaching full retirement age (FRA), $1 in benefits will be deducted for every $2 you earn above the annual limit ($17,040 in 2018). During the calendar year in which you reach FRA, $1 will be deducted for every $3 you earn above a higher annual limit ($45,360 in 2018), but only until the month you reach full retirement age. Fortunately, you won’t lose these benefits forever. Once you reach FRA, your lifetime benefit will increase to account for the loss amount.

2. Taxes on Benefits

If you have substantial income (such as wages or other taxable income), a portion of your Social Security benefits may be taxable. You may owe federal income tax on up to 50% of your benefits if your combined income exceeds a “base amount” of $25,000 ($32,000 for joint filers). And if your combined income exceeds a higher base amount of $34,000 ($44,000 for joint filers), you may owe tax on up to 85% of your Social Security benefits.

One size DOES NOT fit all. Your retirement options should be in under your control. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

IRS rules for inheriting retirement accounts are complex, and an uninformed decision could result in unexpected taxes and penalties. Your options depend on your relationship to the original owner and the owner’s age at the time of death.

Beneficiaries of both traditional and Roth IRAs must take required minimum distributions (RMDs), with one exception for spouses (described below). If the original owner died after reaching age 70½ and did not take an RMD for the year of death, you may also have to take the owner’s RMD by the end of the calendar year.

Special Rules for Spouses

A surviving spouse can roll the inherited IRA assets to a new IRA in his or her own name. If the spouse is the sole beneficiary, the inherited IRA can simply be redesignated in the surviving spouse’s name (if allowed by the account trustee). Because the spouse becomes an owner of the account, he or she can make additional contributions, name beneficiaries, and avoid RMDs from a Roth IRA. A surviving spouse must take RMDs from a traditional IRA. However, this only has to start when the surviving spouse reaches age 70½.

Options for Designated Beneficiaries

Nonspouse beneficiaries, as well as a spouse who does not treat an inherited IRA as his or her own, cannot contribute to the IRA and can only name “successor beneficiaries.” In most cases, the funds must be transferred directly to a properly titled beneficiary IRA; for example, “Joe Smith (deceased) for the benefit of Mary Smith (beneficiary).”

All designated beneficiaries typically have four distribution options:

1. Life expectancy method. A “stretch IRA” typically involves taking RMDs over the life expectancy of the beneficiary. A non-spouse beneficiary must start taking distributions no later than December 31 of the year following the year of the IRA owner’s death. A spouse beneficiary may be able to delay payments until the year the IRA owner would have reached age 70½.
2. Five-year rule. If the original owner died before reaching age 70½, the beneficiary can satisfy RMD rules by withdrawing all assets — in one or multiple distributions — within the five-year period that ends on December 31 of the fifth year after the IRA owner’s death.
3. Lump-sum distribution. Regardless of the original owner’s age, the beneficiary can withdraw his or her entire share of the inherited IRA by December 31 of the year following the original owner’s death. This may be appropriate for small accounts, but you should think twice before liquidating a large account.
4. Disclaim the inherited funds. This may be appropriate if you do not need the funds and prefer that they pass to another beneficiary with greater needs or who would be subject to lower RMDs, allowing more time for the funds to grow. A qualified disclaimer statement must be completed within nine months of the IRA owner’s date of death.

It can cost you a penalty equal to 50% if you fail to withdraw the appropriate RMD amount. Distributions from a traditional IRA are taxable as ordinary income. Distributions of Roth IRA contributions are not taxable, but the account must meet the appropriate five-year Roth holding period for tax-free distributions of earnings.

Avoid Costly Mistakes! When there are multiple beneficiaries or the IRA goes to an estate or a trust, distribution rules become more complex. Let me show you how to get the most from your retirement planning. Contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD. Contact me 1-833-313-7233.

When it comes to receiving the fruits of your employer-sponsored retirement plan, you have a few broad options. Should you take the payout as systematic payments, a lifetime annuity, or a lump sum?

1. Systematic withdrawals

Some retirement plans may allow you to take systematic withdrawals: either a fixed dollar amount on a regular schedule, a specific percentage of the retirement money value on a regular schedule, or the total value of the retirement monies in equal distributions over a specified period of time.

2. The lifetime annuity option

Your retirement plan may allow you to take payouts as a lifetime annuity, which converts your balance into guaranteed monthly payments based on your life expectancy. If you live longer than expected, the payments continue anyway.*

There are several advantages with this payout method. It helps you avoid the temptation to spend a significant amount of your assets at one time and the pressure use a large sum of money that might not last for the rest of your life. Also, there is no large initial tax bill on your entire nest egg; each monthly payment is subject to income tax at your current rate.

If you are married, you may have the option to elect a joint and survivor annuity. This would result in a lower monthly retirement payment than the single annuity option. However, your spouse would continue to receive a portion of your retirement income after your death. If you do not elect an annuity with a survivor option, your monthly payments end with your death.

The main disadvantage of the annuity option lies in the potential reduction of spending power over time. Annuity payments are not indexed for inflation. If we experience a 4% annual inflation rate, the purchasing power of the fixed monthly payment would be half in 18 years.

3. Lump-sum distribution

If you elect to take the money from your employer-sponsored retirement plan as a single lump sum, you would receive the entire balance in one payment. You can invest and use it as you see fit. You would retain control of the principal and could use it whenever and however you wish.

Of course, if you choose a lump sum, you will have to pay ordinary income taxes on the total amount of the distribution (except for any after-tax contributions you’ve made) in one year. A large distribution could easily move you into a higher tax bracket. Another consideration is the 20% withholding rule. If an employer issues a check for a lump-sum distribution, they must withhold 20% toward federal income taxes. Thus, you would receive only 80% of your nest egg balance, not 100%. Distributions taken prior to age 59½ (or in some cases age 55 or 50) may also be subject to a 10% federal income tax penalty.

To avoid some of these problems, you might choose to take a partial lump-sum distribution. Then, roll the balance of the funds directly to an IRA or other qualified retirement plan in order to maintain the tax-deferred status of the funds. An IRA rollover might provide you with more options, not only in how you choose to invest the funds but also in how you access the funds over time.

After you reach age 70½, you generally must begin taking required minimum distributions from traditional IRAs and most employer-sponsored retirement plans. The tax on these distributions will be as ordinary income.

Note: Special rules apply to Roth accounts.

Before you take any action on retirement plan distributions, it would be wise to consult with a tax professional. Choose carefully, because your decision and the consequences will remain with you for life.

*Annuity guarantees are subject to the financial strength and claims-paying ability of the insurer.

My business is to help you manage your money BETTER so you can enjoy a golden retirement. I can help you start the process today!  Let’s talk. Meet me for a FREE retirement strategy consultation at my office by calling  1-833-313-7233.

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan (such as a 401(k), 403(b), and self-employed plans) after the owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½. Some employer plans may allow still-employed owners to delay distributions until they stop working, even if they are older than 70½.

RMDs are designed to ensure that owners of tax-deferred retirement monies do not defer taxes on their retirement dollars indefinitely. You are allowed to begin taking penalty-free distributions from your tax-deferred retirement nest egg after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution for that year. Annual RMDs must be taken each subsequent year no later than December 31.

The RMD amount depends on your age, the value of the nest egg dollars, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each set of monies that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.

Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax. Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.

My business is to help you manage your money BETTER so you can enjoy a golden retirement. I can help you get the process started today!  Let’s talk. Meet me for a FREE retirement strategy consultation at my office by calling 1-833-313-7233.

Tax-deferred plans can be a great way to save money for retirement, but you can’t defer your tax liability forever. Once you reach age 70½, you must begin taking required minimum distributions (RMDs) from these plans each year or face a 50% penalty on the amount that should have been withdrawn. If you are still employed, you may be able to delay minimum distributions from your current employer’s plan until after you retire, but you still must take RMDs from other tax-deferred accounts (except Roth IRAs). The RMD is the smallest amount you must withdraw each year, but you can always take more than the minimum amount.

Basic Rules

Even though you must take an RMD for the tax year in which you turn 70½, you have a one-time opportunity to wait until April 1 (not April 15) of the following year to take your first distribution.

For example:
If your 70th birthday is in November 2015, you will turn 70½ in May 2016 and must take an RMD for 2016 no later than April 1, 2017.
You must take your 2017 distribution by December 31, 2017.
Your 2018 distribution by December 31, 2018.

Let’s sit down & look at your medicare and social security benefits to get the most for your retirement. Meet me for a FREE retirement strategy consultation at my office at 833-313-7233 | MD, VA & DC.